Unit 5: The aggregate expenditures model
Assumptions and simplifications
The Keynesian aggregate expenditure model
GDP=DI
we assume that the presence of excess production capacity and unemployment labor implies that an increase in aggregate expenditures will increase real output and employment without raising the price level
Prices are fixed
Begin with private, closed economy:
- Consumption spending
- Investment spending
Consumption and investment schedules
The investment schedule Ig shows the amount of investment forthcoming at each level of GDP
The investment demand curve ID shows how much investment firms plan to make at each interest rate
In the private closed economy the 2 components of aggregate expenditures are consumption, c and gross investment Ig.
Equilibrium GDP: C+ Ig=GDP
Occurs where the total quality of goods produced (GDP) equals the total quality of goods purchased (C+Ig)
Saving equals planned investment
Combine consumption and investment to create an aggregate expenditure schedule for a private closed economy and determine the economy's equilibrium level of output
No unplanned changes in inventories
Saving is a leakage of spending
investment is an injection of spending
Firms do not change production
The aggregate expenditure model is a stuck-price model in which the amount of real output depends on the amount of total spending in the economy
Firms decide how much real output to produce in response to unexpected changes in inventory levels